July 2008 Report

July 24th, 2008

On this website we publish our recession probability estimates and forecasts for the US economy obtained using the methodology in Paap et al. (2009), as described below. The website is updated every month, shortly after the release of The Conference Board's Coincident Economic Index (CEI) and Leading Economic Index (LEI).

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Figure 1. Recession Probabilities for the US Economy

Figure 1 shows recession probability estimates over the last ten years up to June 2008. These are based on the CEI and LEI vintages released on July 21st.

In June 2008, the LEI decreased 0.1 percent and the CEI increased 0.1 percent.

Our first estimates of the coincident and the leading recession probability for June 2008 equal 67 percent. The signal that the US economy has entered into a recession has become slightly less strong due to a modest increase in the coincident index in June, but remains fairly convincing. The current data vintage shows a substantial decline in the leading index since July 2007, while the coincident index has been steadily declining after October 2007. Based on this data vintage the peak has occurred in December 2007, as the coincident recession probability increased from 44 percent in that month to 53 percent in January 2008.

The probabilities are obtained from a Markov-Switching model for monthly growth rates for the CEI and LEI. The model assumes that the two variables share the same cycle, where the LEI leads the CEI with lead times at peaks and troughs allowed to be different. The model therefore produces both a 'coincident' and a 'leading' recession probability.

Figure 2 shows coincident and leading recession probabilities since January 1959. The blue and green shaded areas indicate months that are part of periods during which this probability exceeds 0.5 for at least six consecutive months. This corresponds with the popular rule of thumb saying that the economy is in recession whenever economic growth is negative during two consecutive quarters. The recession periods as determined by the NBER are also shown for comparison.

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Figure 2a. Recessions as determined by the NBER

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Figure 2b. Recession Probabilities for the CEI

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Figure 2c. Recession Probabilities for the LEI

Time series plots of the July 2008 vintages

Figure 3 displays the time series plots of the log levels and monthly growth rates of the LEI and CEI, together with the recession periods as determined by the NBER, indicated by the yellow shaded areas. The leading index has a similar cyclical pattern as the coincident index, but with turning points clearly occurring earlier, and recessions lasting considerably longer.

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Figure 3a. Time Series Plots of the July 2008 Vintages: Levels
Source: The Conference Board

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Figure 3b. Time Series Plots of the July 2008 Vintages: Monthly Growth Rates
Source: The Conference Board